Weak China Auto Sales Won't Hamper Ford And GM

The slowdown in China's economic growth this year, along with the stock market crash, has created problems for a number of companies who rely on the country for a sizable portion of their profit, such as Detroit-based automakers Ford (F) and General Motors (GM). Though Beijing is taking measures to arrest the slowdown in China by launching stimulus programs to shore up the economy and the stock market, the fact that China is no more growing as fast as it did over the last 3 decades cannot be denied.

The GDP growth of China has continuously declined over the past few years.

It grew for the last time from 2009 to 2010, and went above the 10% mark. But, from then on, the numbers have dropped. China ended last year with a GDP growth rate of 7.4%, and this year, through the first half, the growth rate stood at 7%. Most analysts had forecasted something similar for the full year 2015, but there is a likelihood that China's GDP growth rate can go further down.

In line with the overall economy, important indicators such as industrial production and retail sales growth have also slowed down. For instance, in June, China's industrial profits dropped 0.3%. Thus, it is evident that China is facing a slowdown, and despite stimulus measures, there is no sign of a turnaround.

The effect on the automobile industry

The Chinese auto industry is also bearing the brunt of the economic slowdown. In fact, the growth of the auto industry in China has dropped from 16% in 2013 to 9.9% last year, as shown below. Additionally, the projection for 2015 is weaker at 8%, which looks likely given the recent drop in auto sales in China. For instance, in June, China auto sales dropped 2.3% as compared to last year, which is the first year-over-year decline in monthly auto sales in more than two years in China.

Why Ford and GM stand to lose

The slowdown in the Chinese auto industry is hurting global automobile companies that were counting on China as their next growth frontier. China is the biggest automobile market in the world, bigger than even the U.S. and European Union countries. Thus, major OEMs such as Ford and GM are aggressively pursuing growth in this area.

In fact, 20% of GM's profits come from China, compared to 14% for Ford. Industry experts state that GM's presence and reliance on China sales and revenue is huge, and it will be hit harder than any other global player. Ford, on the other hand, has a lower level of dependence on China.

As such, it is not surprising to see that Goldman Sachs downgraded General Motors stock to “neutral” from “buy,” while it upgraded Ford to “buy” from “neutral.” Both the actions have the China slowdown as one of the major reasons behind them. Goldman reasons this by saying that GM's guidance for China “looks vulnerable,” while Ford has an “easier growth trajectory” in China because of having a smaller market share.

Ford has 15 new vehicles for China in its pipeline. Thus, its near-term product momentum appears stronger since Ford can grow from its relatively small market share of 4.5% by launching new vehicles, while GM has a lot to lose since its market share at the end of last year in China was 14.8%. So, how are the two Detroit automakers going to combat the slowdown in the Chinese market? Let's find out.

Gearing up for the second half

China is where GM sells most of its vehicles in terms of volume. Along with its joint venture partners, the company is planning to invest $14 billion in China through 2018 to build seven manufacturing plants. It will add new and redesigned vehicles in the second half of the year to maintain its market share. But, at the same time, GM is also relying on price cuts to increase volumes.

GM CEO Mary Barra believes, “China is an emerging market. It's a very big market. We have very strong products. We have a strong brand with Buick. We're continuing to grow Chevrolet and Cadillac.”

Ford is also enthusiastic about the second half in China. It held 4.2% market share last year, and sold 543,488 vehicles in China through June this year, flat from a year ago. Ford will open four factories this year as a part of its growth strategy. The company is readying five soon to be launched new products, which include the Ford Taurus, the Ford Explorer, the Ford Everest, the Ford Focus, and the Focus ST. Expectations are high that these will provide the much needed growth momentum. Otherwise they will be cutting production in order to avoid the build-up of inventory.

Conclusion

GM, which has a greater market share in China as compared to Ford, is doing the right thing by trying to keep its market share intact and focus on moving more volumes. On the other hand, by bolstering its portfolio, Ford is trying to increase its market share in China by offering customers more variety. Thus, both companies are adopting smart strategies to suit their needs and overcome the slowdown in the Chinese market.